Tarullo: Glass-Steagall no cure-all

The Federal Reserve’s point man on overseeing the banking industry on Monday questioned the benefit of reinstating a Depression-era law that would separate commercial and investment banking activities — an idea being championed by Sens. Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.).

Last week the senators introduced what they are calling a modern day Glass-Steagall Act, arguing that Wall Street banks still pose a threat to the economy and taxpayers because they take too many risks risks and that the banking business should return to its “boring” roots.

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Fed Gov. Daniel Tarullo said Monday that the repeal of Glass-Steagall in 1999 was not a major factor in the 2008 financial crisis and that putting it back in place would not necessarily address the current threats to the financial system, such as banks’ reliance on volatile short-term funding markets.

“There’s some question as to how much that separation would actually prevent the kind of problems we saw from developing,” Tarullo said at POLITICO’s Morning Money Breakfast Briefing in reference to financial institutions that ran into trouble during the financial crisis.

The repeal of Glass-Steagall has been seized upon by reform advocates as a moment when Wall Street deregulation went too far and the era of excessive risk taking that led to the 2008 financial crisis began in earnest.

The banking industry and some regulators have pushed back against this argument noting that the financial institutions that fared worst during the financial crisis — such as Lehman Brothers and Bear Stearns — were investment banks that didn’t have big commercial banking operations.

Warren last year campaigned on the idea of breaking apart banks’ commercial and investment banking activities, arguing if Wall Street banks want to make risky bets in financial markets, they should not be able to do so while still receiving a government backstop for their more traditional deposit-taking businesses.

Last week when the bill was introduced, Warren told reporters that a return to Glass-Steagall was just one piece of what should be done to further crack down on big banks.

“It will stop the game that these banks have played for far too long,” she added.

The bill would close loopholes and update Glass-Steagall by excluding new instruments, like complex derivatives and swaps, from traditional commercial banking, Warren said. She acknowledged that the bill by itself would not end too big to fail, but said it would make financial institutions smaller and safer by separating depository institutions from riskier activities.

Warren even has a slogan for the bill — “Banking should be boring” — and a website urging visitors to sign their names in support of the bill.

“Americans want safe banks,” she said. “The banks that handle their checking accounts, their savings accounts should be rock solid secure. And they should not be juicing their profits by taking those insured deposits and betting them in wild financial schemes.”